Sideways Market — Meaning, Best Example & How to Trade 2021

When you start tracking the stock market, Generally you hear that it’s a bullish market, it’s a bearish market or sometimes it’s a sideways market. However, Bullish & Bearish are clear trends but what about the sideways market? To Understand this let’s discuss it in detail with examples.

What is Sideways Market?

A sideways market, also known as sideways drift, takes place when the price of stocks which are included in a major index will trade in a relatively consistent zone for an extended length of time without establishing any identifiable patterns.

Consequently, price movement floats in a parallel zone or channel, with neither bulls nor bears controlling the market. A trending market is the polar opposite of a sideways market.

A trending market is one in which the price goes in one direction, either upwards or downwards, with no firm support or resistance.

In this case, the price creates tiny supports and resistances that it breaks out of to maintain the pattern.

Note:

The quantity traded is also reduced in a market that is going sideways. Given that the rate is not changing in any particular direction, there are an equal number of bulls and bears investing the asset, resulting in a roughly constant quantity exchanged.

Choppy Market

Sideways markets are called choppy or non-trending markets. When studying sideways trends, analysts should look at other technical indicators and chart patterns to see where the price is likely to go and when a breakout or collapse is imminent.

If there is a sequence of moves up and down, but they keep going back to an average range. Investors might benefit by selling call and put options with approaching expiry date if the sideways trend is likely to continue for a long time.

How to trade in Sideways market?

Depending on the features of sideways trends, there are a variety of strategies to benefit from them. Traders would often search for validation of a breakthrough or breakdown in the form of technical indicators or chart patterns, or they may try to profit from the sideways price movement itself using a number of techniques.

Risk & Reward

A sideways trend can be utilized by predicting breaks above or below the trading range, or by seeking to profit as price swings between support and resistance inside the sideways trend.

Traders who adopt a range-bound approach should ensure that the sideways trend is wide enough to achieve a risk-reward ratio of at least 2:1, which indicates that for every rupee risked, investors gain two rupees.

Support & Resistance

Many traders are interested in finding horizontal price channels with a sideways trend. Traders may try to purchase the stock when the price is reaching support levels and sell when the price is approaching resistance levels if the price has consistently rebounded from support and resistance levels. In the event of a breakout, stop-loss levels may be set immediately above or below these levels.

Option Techniques

Option techniques may also be used by skilled traders to gain from sideways trend fluctuations. Options traders can utilize straddles and strangles, for example, if they believe the price will stay inside a specific range.

Example

You may sell a straddle, which is a combination of an at-the-money call and a put option for the same basic asset with the same strike and expiry month.

Time decay erodes the option premiums as the expiry date gets closer, and if the market continues sideways, the option premiums will eventually decay to zero.

Nevertheless, if the price goes beyond these ranges, these options may lose all of their value, making the methods riskier than purchasing and selling shares.

Originally published at https://profitmust.com on June 28, 2021.